July 2021 Stock Market Commentary

Equities advanced in July for a sixth consecutive monthly gain, as domestic market strength continues to lead the rest of the world higher. The S&P 500, a benchmark for large cap US stocks, added another +2.4% for the month and is now up +18.0% in 2021.

Smaller company stocks backed off in July after a strong first half of the year, with the Russell 2000 Index falling -3.6% in July to bring the year-to-date return to +13.3%. Overseas equities fell -1.7% on the month, primarily due to weakness out of China, where regulatory crackdowns rocked local equity markets. The MSCI ACWI ex-US index is now up +7.4% for the year.

Fixed income markets continued their rally, with the Barclays US Aggregate Bond Index gaining +1.1% in July for a -0.5% return YTD. Long-term rates came down as concerns over runaway inflation have moderated. Despite elevated headline data, the Dallas Fed’s Trimmed Mean PCE, an alternative measure of core inflation, is up just 2% in the last year. Gold rallied +3.6% on the month, with prices now down -3.3% on the year.

We saw no changes in any of our proprietary “Three Dials” readings during the month of July, each of which are summarized below:

1. Market Sentiment and Momentum: Positive

Technical strength within domestic equities has been remarkably consistent in 2021, with intra-month dips finding support around the 50-day Moving Average to end the month at another record high. While overseas equities have traded slightly more range-bound recently, on balance our Momentum Dial remains in a “Positive” position at the end of July.

2. Economic Fundamentals: Positive

Advance estimates indicate that the US economy grew at a +6.5% annualized rate during Q2, a slight acceleration from the prior quarter. Meanwhile, the IMF upped their global growth forecast for 2022 by 0.5% to +4.9%, indicating that a strong fiscal response and improved public health metrics should sustain above-average growth in the near-term. While risks posed by the delta variant should not be ignored, our Fundamental Dial remains in a “Positive” position based on the current pro-growth landscape.

1. 3. Valuation: Negative 

While US equity valuations continue to sit near record highs, corporate earnings for Q2 have been overwhelmingly positive so far, lending credence to the idea that stocks may be able to grow into these lofty price-to-earnings ratios. On the other hand, relative valuations overseas appear a bit more attractive, where post-COVID growth continues to lag. On balance, our Valuation Dial remains negative.

Our Three Dials composite reading continues to take a “Cautiously Optimistic” view, as strong showings in the areas of Momentum and Economic Fundamentals are balanced by Valuation concerns.

Sources:

https://www.morningstar.com/

https://www.wsj.com/articles/investors-rethink-china-bets-after-beijing-crackdown-triggers-stock-market-rout-11627669954

https://www.dallasfed.org/research/pce#tab1

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/TextView.aspx?data=yieldYear&year=2021

https://www.bea.gov/news/2021/gross-domestic-product-second-quarter-2021-advance-estimate-and-annual-update

imf.org/en/Publications/WEO/Issues/2021/07/27/world-economic-outlook-update-july-2021

factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_073021.pdf